Alaska Air Group, Inc

About Alaska Air Group, Inc

Whether you want to capture a "Kodiak" moment or down a daiquiri by the Sea of Cortez, an Alaska Air Group airplane can fly you there. Operating through primary subsidiary, Alaska Airlines, and regional carrier Horizon Air, the group flies more than 29 million passengers to more than 100 destinations in the US (mainly western states including Alaska and Hawaii), Canada, and Mexico. The group's primary hub is Seattle (accounting for almost two-thirds of passengers), but it also flies out of key markets such as Portland, Oregon; Los Angeles; and Anchorage, Alaska. Alaska Airlines has a fleet of about 140 Boeing 737 jets. Horizon Air operates more than 50 Bombardier Q400 turboprops.

Geographic Reach

Alaska Air Group serves more than 100 cities through an expansive network in Alaska, the contiguous 48 states, Hawaii, Canada, and Mexico. The company leases operations, training, and aircraft maintenance facilities in Portland and Spokane, as well as line maintenance stations in Boise, Bellingham, Eugene, San Jose, Medford, Redmond, Seattle, and Spokane. It also leases call center facilities in Phoenix and Boise.

Operations

Accounting for 93% of revenue, the passenger segment's Alaska line is divided into Alaska Mainline (70%), which makes flights with average stage lengths that are more than 1,000 miles, and Alaska Regional (15%), for shorter distances. Regional airline Horizon sells all of its capacity to Alaska under a capacity purchase agreement. In a given year, Mainline operations carry 21 million revenue passengers while regional operations, which includes Horizon, transport more than 8 million revenue passengers, mainly in Washington, Oregon, Idaho, and California.

As its name would imply, the airline transports more passengers between Alaska and the US mainland than any other airline. Besides its own flights, the segment provides passenger service through contracts with SkyWest Airlines and Peninsula Airways. Carrying about 4% of all US domestic passenger traffic, the segment also includes such non-ticket revenue as reservations fees, ticket change fees, and charges for baggage service.

Freight and mail account for 2% of revenue. The Other segment, around 13% of revenue, includes the Mileage Plan, on-board food and beverages, commissions from car and hotel vendors, and travel insurance. The Mileage Plan awards miles for flights on Alaska, Horizon, and partner airlines and sells miles to third parties.

Sales and Marketing

The airline tickets are distributed through the airline's website and through traditional and online travel agencies who use global distribution systems to obtain their fare and inventory data from airlines and reservation call centers located in Phoenix; Kent, Washington; and Boise, Idaho.

The company has increased its investment in advertising year-over-year; in 2014, the company spent $49 million on advertising, compared to $28 million in 2013.

Financial Performance

Alaska Air’s revenue has grown steadily over the last few years. In 2014 its revenues increased by 4% due to an 8% increase in mainline passenger capacity by new routes, the addition of seats to the existing fleet, and along with the delivery of 10 737-900ERs. Revenues from regional passengers also rose as the result of an increase in capacity offset by lower passenger revenues per available seat mile, and an increase in its Mileage Plan revenues.

Net income has grown consistently. In 2014 income increased by 19% due to higher revenues and lower expenses on aircraft fuel and aircraft maintenance, offset by a rise in non-fuel expenses due to increased capacity resulting in higher wages and benefits and landing fees.

Alaska Air's operating cash flows have also increased steadily. ln 2014 it increased by 5% due to higher income, an increase in inflows from advance ticket sales, air traffic liability, and decrease in pension outflows. This was offset by increased outflows in accounts receivable and lower inflows from deferred revenues, and a deferred tax provision.

Strategy

Besides focusing on key markets such as Seattle and Los Angeles, another important component of Alaska Air's strategy includes marketing alliances with other airlines for reciprocal frequent flyer mileage credit and codesharing. Alaska has relationships with about a dozen major airlines, such as AMR's American Airlines, Air France, Delta Air Lines, and Qantas, as well as two other regional airlines besides SkyWest and Peninsula Air: Era Alaska and Kenmore Air.

Like the airline industry as a whole, Alaska Air has been challenged by fluctuating fuel costs, which have been known to head up even higher in Alaska's operating territory of the West Coast than in the Gulf and East coasts. Alaska cushions itself against such volatility with crude oil call options, jet fuel refining margin swap contracts, and the acquisition of more fuel-efficient aircraft, including the Boeing 737-800 and 737-900ER.

As of 2015, the company was seeking government approval to begin service from Orange County, California.

Growing its Seattle hub, in 2014 it launched service to six new cities: Albuquerque, Baltimore, Cancun, Detroit, New Orleans and Tampa.

In 2014, the company expanded its partnership with SkyWest Airlines with the addition of three new destinations from Alaska's Northwest hubs. SkyWest has purchased seven E175 aircraft to fly on behalf of Alaska Air. The first three aircraft will arrive in 2015, and the remaining four in 2016. Through this partnership the company will offer 298 peak-day departures to 81 destinations from Seattle. From Portland, starting in July 1015, Alaska Airlines plans to offer 125 peak-day departures to 44 destinations, more than any other carrier.